The Employee Welfare Trust (EWT) of IndiaBulls Financial Services dumped 2.4 crore (24 million) shares of the company in the market, at a price of around Rs. 284 per share. Some of the shares were bought by: Copthall Mauritius: 2.81 million shares. HSBC Global Investment Funds, Mauritius: 3.1 million shares Merrill Lynch Cap Markets Espana: 3.19 million shares Swiss Finance Corporation, Mauritius: 2.49 million shares. Overall, 11.5 million shares, about half the dumped shares, were bought by the above entities. The stock has fallen 4.7% to 284. History Remember that Veritas, the Canadian research firm, had questioned the role of the EWT with their Indiabulls report. I had then written about the IndiaBulls EWT in particular (Read: V eritas-Indiabulls Fight: The Employee Welfare Trust ). Salient points: The EWT got loans of Rs. 900 cr. from Indiabulls, to buy shares from the market. At 12% interest. The EWT has no other income. Dividends are only 5-7% Thus, the share price needs to go up for the EWT to return the cash – otherwise, options aren’t going to be exercised. This is a huge risk. Also it amounts to the company buying its own shares in a way – it is lending money to a related entity, that buys its shares. The quantum of the loan is totally out of whack. 900 cr. could buy more than 3 cr. worth of shares; the outstanding equity option count was way below that (less than 1 cr. shares in existing schemes). However other options in the pool remained unvested. Also note that SEBI has banned Employee Trusts from buying shares in the market in Jan 2013. Shareholding Pattern Revelations I had noted that it was disburbing Indiabulls was not revealing the EWT stake if they did indeed own it. Almost on cue, in the September 2012 shareholding pattern note, they declared the EWT as owning nearly 10% of the company (3 cr. shares). In December the EWT owned 2.48 cr. shares. (The EWT must have sold the difference in between) The EWT has now declared to the exchange that they own nothing. They had 3.1 crore shares, and have sold all of them between September 14, 2012 and Feb 8, 2013. Did IndiaBulls lose money lending to the EWT? In their conference calls they have mentioned that the average cost of Indiabulls shares for the EWT was Rs. 175. That would have resulted in a loan of only Rs. 525 cr. to the EWT. But IndiaBulls has lent a total of Rs. 896 cr. (plus about 109 cr. of interest accrued but not due) according to their annual report 2011-12. That means the trust needed to pay back over Rs. 1000 cr. eventually. However, the money they would have realized from the the sale now is a little short of Rs. 900 cr. Even considering that the dividend in the last 12 months has been Rs. 20.5 per share, they would have got just a little more than Rs. 60 cr. in dividend. All this adds up to Rs. 960 cr. that the EWT has received since March 2012. With 960 cr. the EWT will not be able to return all the money it owes, as per my calculations. It obviously owes more than 1,000 cr. as of March 2012 – add another nine months of interest at 12% and you find the EWT actually owes around 1090 cr. or so. The proceeds of the sale plus dividends equals Rs. 960 cr. This is short by around 130 cr. Since the EWT has no more holdings, what happens now? How can the EWT pay any more? Is this a hit that Indiabulls will take? Note that a Rs. 130 cr. loss is not a huge amount – it would hit their next quarter’s profit by about 25% but it’s one-time in nature. Questions SEBI Must Ask Why were there no shareholding pattern revelations about the EWT’s holdings prior to September 2012? They obviously seemed to have held nearly 10% of Indiabulls for a while and none of this seems to have been revealed prior to September 2012. All companies must reveal names of holders > 1%, quarterly. The SEBI Notification dated Jan 17, 2013 explicitly demanded that all companies with existing ESOP trusts must put full details of all transactions made by the trust since April 1, 2012 up on the company’s website, within 30 days of the notification. It must probe into Indiabulls if it does not put such details up by Feb 16. Based on the transaction details of the EWT, is it possible to infer that the EWT was trading in the shares of the company? As in, was it only buying, or buying/selling consistently? This is wrong only because it was funded by the company itself. The only reason one should probe this is because all shares have now been sold by the EWT, and presumably they have not cancelled any existing stock option plans; that means they intend to only issue new shares to the employees as they vest. Why not keep the shares in the EWT and just not buy any further? Too much interest cost? Gagan Banga was confident in his conference call that just dividend income would be enough to offset the interest cost for the EWT. However that is not sustainable, I can imagine. But SEBI can’t ask why (there’s no forcing a trust NOT to sell shares) – they can only probe to see if there was fraudulent trading, with an intent to manipulate, or inconsistent with the concept of the ESOP trust. My Outlook IndiaBulls finance will soon change its name and become a pure housing finance company. I will avoid buying; given the new float in the market, I presume that the stock will remain under pressure for some time. Secondly, the results have been great, but housing in general will go through tremendous stress in the coming years, and I don’t want to touch a lending business in that area. I also think that the company is likely to see some sort of SEBI probe. If we are asked why we don’t invest in stocks, as retail public, it is simply because when things like this happen and there is no investigation, we tend to believe the market is rigged in favour of big companies. A change in image can only be brought about by investigation and imposing heavy penalties on big-company defaulters.